Dilution modeling 101: protecting your ownership stake

What dilution is

Dilution is the drop in an existing holder's ownership percentage when new shares are issued. If you own 500 of a company's 1,000 shares (50%) and the company issues 1,000 more, your 500 shares are now 25% of 2,000.

Your share count didn't change. Your percentage, and the voting and economic weight that comes with it, halved.

Dilution is a normal part of growing a company. It happens when you:

• Raise a priced funding round
• Create or expand an employee option pool
• Grant shares to advisors
• Convert SAFEs or convertible notes
• Bring in new partners with equity

The point of modeling is to see the effect before you commit, so you choose when and how to issue new shares.

Why model it

For founders

Every equity decision dilutes someone. Promising 5% to an advisor, raising a seed round and creating a 15% option pool each reduce your percentage.

Without a model, founders often learn how much they gave up only after the documents are signed. In the example below, a founder who starts at 100% owns about 41% after a Series A, which is normal if it was planned and a shock if it wasn't.

For investors

Investors track their ownership through future rounds. A 20% stake today might be 15% after the next round unless they invest again.

For employees

People with options want to know what their grant will be after dilution. For example, a 1% grant can shrink to a fraction of that after several rounds, even though the share count stays the same.

How to model dilution

The basic formula

New ownership % = your shares ÷ (existing shares + new shares issued)

Pre-money and post-money

In a priced round:

• Pre-money valuation: the company's value before the new investment
• Post-money valuation: pre-money plus the new investment
• Investor ownership: investment ÷ post-money valuation

Example: a company with an $8M pre-money valuation raises $2M.

• Post-money valuation: $8M + $2M = $10M
• Investor ownership: $2M ÷ $10M = 20%
• A founder who owned 100% now owns 80%

The option pool shuffle

Investors often ask for a new or larger option pool to be created before their investment. The pool's dilution then falls on the existing holders, not the new investor.

Without a new pool:

• Pre-money $8M, raise $2M
• The founder goes from 100% to 80%

With a 15% pool created before the round:

• The pool is created first: the founder goes from 100% to 85%
• Then $2M is raised on $8M pre-money
• The founder ends at 68% (85% × 80%)

That pool cost the founder 12 percentage points compared with raising without one.

Modeling several rounds

Dilution compounds. Here is an illustrative path for a startup that raises three rounds:

Illustrative example. Each row multiplies the previous percentage by the share the existing holders keep: 80% × 0.85 = 68%, 68% × 8/10 = 54.4%, and so on. A founder who started with 100% ends with about 35% after three rounds, which is common, provided it was planned.

Scenarios worth modeling

A new funding round

Try different valuations and amounts. For the same investment, a higher valuation means less dilution.

Creating or expanding an option pool

Try different pool sizes. A 10% pool dilutes less than a 20% pool but may not cover the hires you plan before the next round.

SAFE conversion

SAFEs convert at a later priced round. Model a range of valuation caps and discounts to see the spread of outcomes. Our guide to post-money SAFE dilution walks through stacked SAFEs step by step.

Convertible note conversion

Similar to a SAFE, but accrued interest adds to the amount that converts, so dilution grows the longer the note is outstanding.

Secondary sales

When existing holders sell shares to someone else, no new shares are issued, so nobody is diluted. Control can still shift, so it's worth tracking who ends up holding what.

Tools for modeling dilution

A spreadsheet

A spreadsheet with a tab per round works for simple cases. It gets fragile once SAFEs, notes and pool top-ups interact, and it drifts from the real cap table as soon as someone forgets to update it.

A model on the live cap table

The more useful model starts from the cap table you actually have. HYVV's Cap Table includes a dilution modeler on the Operator plan and up (pricing): enter the investment and the pre-money valuation of a priced round, and see every holder's post-round percentage calculated from the current record. SAFE, note and pool scenarios still need the arithmetic above. HYVV tracks real equity — shares or LLC units, options, vesting and grants — and revenue shares for people who shouldn’t hold equity, on one record.

Five rules for managing dilution

1. Model before you commit. Don't issue equity or sign a term sheet without seeing the dilution first.
2. Negotiate the pool. Size the option pool to your hiring plan instead of accepting the first number proposed.
3. Keep the cap table accurate. A model is only as good as the record it starts from.
4. Look two or three rounds ahead. The current round matters less than the path.
5. Share the projections. Show co-founders and key people the numbers so nobody is surprised later.

Dilute on purpose

Dilution isn't bad in itself. A smaller share of a much more valuable company can be worth far more than all of a small one. What matters is diluting intentionally, with every holder able to see the effect before it happens.